Luis is going to receive $20,000 six years from now.Soo Lee is going to receive $20,000 nine years from now.Which one of the following statements is correct if both Luis and Soo Lee apply a 7 percent discount rate to these amounts?
A)The present values of Luis and Soo Lee's monies are equal.
B)In future dollars, Soo Lee's money is worth more than Luis' money.
C)In today's dollars, Luis' money is worth more than Soo Lee's.
D)Twenty years from now, the value of Luis' money will be equal to the value of Soo Lee's money.
E)Soo Lee's money is worth more than Luis' money given the 7 percent discount rate.

Question

Quizplus · Accepted Answer

Both amounts are being discounted back to present value, so the one received sooner (Luis’ money) will have a higher present value since it has less time to be discounted. Therefore, Luis’ money is worth more in today’s dollars than Soo Lee’s money.

Luis Is Going to Receive $20,000 Six Years from Now